Mercy! Mercy! That Dang Nabed PERCY!

Percy Goodfellow on Money

Percy Goodfellow on Money

Today when we hear politicians from the right speak, they often use the analogy of a families financial strategy and the Governments. They point to the Government’s policy of spending more than they take in and point to a family’s inability to sustain this type of imbalance.

There is however one major difference between a Government and a Family and that is that the Government can print money. The paper they issue is the medium of exchange that the economy is stuck with and a government can print as much of it as it wants. When it prints too much there is something called inflation that takes place as a correction.

One of the ways to hide the extent of the inflation that is taking place is to use criteria to measure it that does not show the full extent of the problem. Today inflation is measured not using energy increases and rising food prices. Thus the guide that the average family uses to gauge inflation is not the came criteria that the government uses and as a consequence the inflation is under reported. Hold that thought.

During recent weeks the market has made what is being referred to as another “Correction.” Many say this correction is the result of consumer confidence in the spending of the Government and the inability of the Politicians to rein it under control. No doubt some of this is true. However, the root problem in my view is that the market is making a correction for the silent and unreported inflation that is taking place. If you use energy and food to calculate inflation, in addition to the carefully selected measures currently being used, you would see an annual inflation rate of about ten percent.

This means that if you have a $1,000 in a savings account at the start of the year it has declined in actual value (Buying power) to $900 by the end of the year. This is a silent form of taxation that is being used to create money for government spending that isn’t actually there and when the market “Corrects” the correction is to reconcile reported value with actual value.

As a result the true value of production, goods and services, reflected in open trading on the stock market comes crashing down even though everybody knows that the monetary value of these instruments is greater than what they are being sold for at the end of the day.

The Current Administration, in an attempt to get out of a pickle, that is not entirely of their making, is trying to print their way out of trouble. The bill payers are first off those who have money in CD and Treasury instruments. These are being invisibly devalued as I explasined. Thus it is the Old Codgers who have yet to fully grasp what is happening and perhaps many of the foreign investors who don’t realize their principle is being erroded much more than they realize.

Why, then you ask, are Treasuries and CDs in such demand if they are such a bad investment? A good question and the answer is why little guys should stay out of the stock market.

Right now there is no good place to park the huge amounts of capital that are in the hands of nations and mega investors. While they would certainly like to get a good interest rate, right now, with the fragile world economy, they are willing to settle for keeping what they have. If you have $50 million dollars, making a few more in interest is not the prime concern. The prime concern is keeping what you have.

So they are attracted, in the short term, to the liquidity of Treasury notes and the safety of this investment. This is particularly true of foreign investors in our markets. They see the United States as being the last to fall should a catastrophic crash take place in the world economy. What they fail to realize is that in ten years their investment would be seriously devalued if they parked it there that long. Some claim that lthey will keep it there only until the markets stabilize and then take their capital out to buy up stocks that are undervalued when they think the market has bottomed out.

Another area where money is being parked is Gold. Gold is seen by most as a valuable commodity but keep in mind you can’t eat it and while investors are drawn to it, many fear it is a bubble that will pop once the markets stabilize. In my view this is unlikely for reasons I will discuss in my next blog.

The real value of the Worlds economics rests in the Marketplace. There are resources, goods and services that are essential to a person’s survival and well being and while these can drop below or rise above their actual value, people require these in order to exist. The market will never drop so low that food will have no value, or clothing or shelter or water or breathable air. This is where investors must ultimately park their money even though they become the bill-payer for “Adjustments,“ that result from a government's manipulation of currency.